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Wednesday, July 20, 2016

GOP Platform Embraces Glass-Steagall Reinstatement - But Does It Really?

In perhaps the most bazaar twist in an already surreal election cycle, the 2016 Republican Party Platform states, "We support reinstating the Glass-Steagall Act of 1933 which prohibits commercial banks from engaging in high-risk investment." But wait. Is the Republican platform truly endorsing a reinstatement of an act that would allegedly force the break-up of the largest banks in the nation? Not necessarily.

Perhaps some background is in order first, since "Glass-Steagall" is often bandied about rather callously. The Banking Act of 1933 was clarified for consistency in 1935, and it's that '35 version that we affectionately mean when we refer to Glass-Steagall. The Act had four major restrictions that prevented commercial Federal Reserve Member Banks from:

dealing in non-governmental securities for customers

investing in non-investment grade securities for themselves

underwriting or distributing non-governmental securities

affiliating (or sharing employees) with companies involved in such activities

Similarly, it prevented securities firms and investment banks from taking deposits. Effected banks had to declare in 1934 whether they were commercial banks or investment banks.

Note, however, that the Act only applied to Federal Reserve Member banks. It did not apply to savings and loan banks, nor did it apply to state-chartered banks that did not belong to the Federal Reserve system. Furthermore, numerous loopholes were widely exploited through the formation of holding companies that owned various components all isolated from each other via Glass-Steagall. (Note that this was ultimately tested and upheld when Citigroup, the holding company parent of Citibank acquired Salomon Smith Barney via their merger with Travelers Group in 1998.)

Remember, Glass-Steagall only applied to commercial and investment banks, and it did not impact the overwhelming majority of banks that existed in the US.

The Act itself fell into serious decline, not at the hands of Congress, but rather at the hands of bank regulators and the courts throughout the 1960s and '70s. Bank regulators increasingly interpreted the Act to permit more and more aggressive activities related to securities, and these interpretations were upheld by the courts. The debate to repeal Glass-Steagall began in the 1980s, and it culminated in the Gramm-Leach-Bliley Act (GLBA), passed by Congress in 1999. It was signed into law by Bill Clinton on November 12, 1999. Given that it passed the House 343-86 and the Senate 54-44 (although the Senate passed the conference committee version 90-8,) Clinton believed it to be veto proof and signed it despite being skeptical about the implications.

So that brings us full circle back to the Republican Party Platform of 2016. Here's what they actually said about the reinstatement of Glass-Steagall:

"Sensible regulations can be compatible with a vibrant economy. They can prevent the strong from exploiting the weak. Right now, the regulators are exploiting everyone. We are determined to make regulations minimally intrusive, confined to their legal mandate, and respectful toward the creation of new and small businesses. We will revisit existing laws that delegate too much authority to regulatory agencies and review all current regulations for possible reform or repeal. We endorse Republican legislation, already passed by the House, to require approval by both houses of Congress for any rule or regulation that would impose significant costs on the American people. Further, Congress should work towards legislation that requires removal of a regulation of equal or greater economic burden when a new regulation is enacted. Because regulations are just another tax on the consumers, Congress should consider a regulatory budget that would cap the costs federal agencies could impose on the economy in any given year."

The target of the platform is not any implied breakup of banks as they exist today, and as some of the press is implying. Rather, the target is to rein in excessive regulation of the banking industry. "We are determined to make regulations minimally intrusive, confined
to their legal mandate, and respectful toward the creation of new and
small businesses."

It's a passage that could easily have been written by Jamie Dimon, CEO of J.P. Morgan Chase (NYSE:JPM) who, in his earnings call on January 14, 2015 said, “Banks are under assault [by regulators.] In the old days, you dealt with one regulator when you had an issue.
Now it’s five or six. You should all ask the question about how American
that is, how fair that is.”

Whether or not a reinstatement of the restrictions on commercial and investment banks would help or hurt the economy is a discussion for another day. For now, however, as we listen to two weeks of intense hype surrounding the conventions of both major parties, please understand the reality about what is listed in the Republican platform. It has nothing to do with reimposing the restrictions implied by Glass-Steagall and has everything to do with reducing the bureaucratic red-tape being imposed on the banking industry in the post-2008 crash ecosystem. That, in and of itself, is a good thing, both for the banks and for the consumer. Complying with the regulations as they are currently being imposed is costing banks in the billions annually. With interest rates near zero, that drain on the expense side of the ledger means that banks must recoup that cost through fees. That's a direct impact on the consumer. So that plank in the Republican platform, if properly and carefully implemented, would be a major benefit to the consumer. It just has absolutely nothing to do with Glass-Steagall.